MRS. HEMA KAPUR HARSH TOPPO 245101353 SATISH KUMAR 245101283 TARUN KUMAR 245101309 This is certified that project DEMAND AND SUPPLY which is submitted by Harsh Toppo , Satish Kumar , Tarun Kumar of B.A. (Hons) Economics under the guidance of Mrs. Hema Kapur .
SIGNATURE OVERVIEW *Introduction of Demand and Supply >Demand >Supply >Law of Demand >Law of supply >Determinant of supply
*Market Equilibrium > How demand and supply interact to determine equilibrium price and quantity in a market.
* Shift in Supply and Demand curve
>Factors causing shift in curve
* Case Study >Onion price surge in 2019 INTRODUCTION TO DEMAND AND SUPPLY
Basic Concept of Demand and Supply
DEMAND : Demand refers to the market’s desire to purchase the good or service.
SUPPLY : Supply refers to the market’s ability to
produce a good or service.
LAW OF DEMAND : The law of demand states that, if
all other factors remain the same, the price will be the main factor to influence how much of a commodity is sold. Typically, increasing the price of a commodity will result in a lower quantity sold (lower demand), whereas decreasing the price will increase the quantity sold (higher demand).
LAW OF SUPPLY : The law of supply is essentially
the opposite of the law of demand. According to the law of supply, if no other factors change, price is the main factor influencing how much of a commodity is produced. If the price of a particular product or service increase, suppliers will want to offer more of that product or service. DETERMINANT OF DEMAND 1] Price of the Product
People use price as a parameter to make decisions if all other factors
remain constant or equal. According to the law of demand, this implies an increase in demand follows a reduction in price and a decrease in demand follows an increase in the price of similar goods.
2] Income of the Consumers
Rising incomes lead to a rise in the number of goods demanded by
consumers. Similarly, a drop in income is accompanied by reduced consumption levels. This relationship between income and demand is not linear in nature. Marginal utility determines the proportion of change in the demand levels.
3] Prices of related goods or services
Complementary products – An increase in the price of one product
will cause a decrease in the quantity demanded of a complementary product. Example: Rise in the price of bread will reduce the demand for butter. This arises because the products are complementary in nature.
Substitute Product – An increase in the price of one product will
cause an increase in the demand for a substitute product. Example: Rise in price of tea will increase the demand for coffee and decrease the demand for tea.
4] Consumer Expectations
Expectations of a higher income or expecting an increase in prices of
goods will lead to an increase the quantity demanded. Similarly, expectations of a reduced income or a lowering in prices of goods will decrease the quantity demanded.
5] Number of Buyers in the Market
The number of buyers has a major effect on the total or net demand. As the number increases, the demand rises. Furthermore, this is true irrespective of changes in the price of commodities
MARKET EQUILIBRIUM Market equilibrium is the point where the quantity supplied by producers and the quantity demanded by consumers are equal. When we put the demand and supply curves together, we can determine the equilibrium price: the price at which the quantity demanded equals the quantity supplied. In below figure , the equilibrium price is shown as P∗, and it is precisely where the demand curve and supply curve cross. This makes sense—the demand curve gives the quantity demanded at every price and the supply curve gives the quantity supplied at every price so there is one price that they have in common, which is at the intersection of the two curves. How Demand and Supply interact to determine equilibrium price and quantity in a market. 1 Demand : Demand represents the relationship between the price of a good and the quantity that consumers are willing abd able to purchase.
2.Supply : Supply refers to the relationship between the price of a
good and the quantity that producers are willing and able to sell.
3. Equilibrium Price and Quantity : The equilibrium is the point
where the demand curve intersect the supply curve .At this point:
*The Equilibrium price is the price at which the quantity of the
good that consumers want to buy equals the quantity that producers want to sell.
*The Equilibrium quantity is the quantity of the good that is bought
and sold at the equilibrium price.
4. Market Adjustments :
* Surplus : If the price is above the equilibrium , the quantity
supplied will exceed the quantity demanded, creating a surplus. This puts downward pressure on the price as sellers compete to sell their excess stock.
* Shortage : If the price is below the equilibrium, the quantity
demanded will exceed the supplied, creating a shortage. This causes the price to rise as buyers compete to purchase the limited goods available.
Through this process of adjustment, the market tends to move
toward equilibrium where the quantity demanded equals the quantity supplied, balancing the forces of demand and supply.
SHIFT IN DEMAND AND SUPPLY CURVE
Factors causing shift in Demand curve
Willingness to purchase suggests a desire, based on what
economists call tastes and preferences. If you neither need nor want something, you will not buy it. Ability to purchase suggests that income is important. Professors are usually able to afford better housing and transportation than students because they have more income.
Prices of related goods can affect demand also. If you need a
new car, the price of a Honda may affect your demand for a Ford. Finally, the size or composition of the population can affect demand. The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula.
Normal and inferior goods
A product whose demand rises when income rises, and vice versa, is called a normal good. A few exceptions to this pattern do exist, though. As incomes rise, many people will buy fewer generic-brand groceries and more name-brand groceries. They are less likely to buy used cars and more likely to buy new cars. They will be less likely to rent an apartment and more likely to own a home, and so on. A product whose demand falls when income rises, and vice versa, is called an inferior good. In other words, when income increases, the demand curve for an inferior good shifts to the left.
How does income affect demand?
Say we have an initial demand curve for a certain kind of car. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable and that people generally see cars as a desirable thing to own. This will cause the demand curve to shift . As a result of the higher income levels, the demand curve shifts to the right, toward D1. People have more money on average, so they are more likely to buy a car at a given price, increasing the quantity demanded. A decrease in incomes would have the opposite effect, causing the demand curve to shift to the left, toward D2]. People have less money on average, so they are less likely to buy a car at a given price, decreasing the quantity demanded.
FACTORS CAUSING SHIFT IN SUPPLY CURVE
Natural conditions In 2014, the Manchurian Plain in Northeastern China—which produces most of the country's wheat, corn, and soybeans— experienced its most severe drought in 50 years. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied. Conversely, especially good weather would shift the supply curve to the right .
New technology When a firm discovers a new technology that allows it to produce at a lower cost, the supply curve will shift to the right as well. For instance, in the 1960s, a major scientific effort nicknamed the Green Revolution focused on breeding improved seeds for basic crops like wheat and rice. By the early 1990s, more than two- thirds of the wheat and rice in low-income countries around the world was grown with these Green Revolution seeds—and the harvest was twice as high per acre. A technological improvement that reduces costs of production will shift supply to the right, causing a greater quantity to be produced at any given price.
Government policies Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. For example, the U.S. government imposes a tax on alcoholic beverages that collects about $8 billion per year from producers. Taxes are treated as costs by businesses. Higher costs decrease supply for the reasons .
How production costs affect supply
A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus—no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. A shift in supply means a change in the quantity supplied at every price. Say we have an initial supply curve for a certain kind of car. Now imagine that the price of steel—an important ingredient in manufacturing cars—rises so that producing a car becomes more expensive. As a result of the higher manufacturing costs, the supply curve shifts to the left, toward S1. Firms will profit less per car, so they are motivated to make fewer cars at a given price, decreasing the quantity supplied. A decrease in costs would have the opposite effect, causing the supply curve to shift to the right, toward S2. Firms would profit more per car, so they would be motivated to make more cars at a given price, increasing the quantity supplied. CASE STUDY OF ONION PRICE SURGE IN 2019 A real world example from India that demonstrates how demand and supply dynamics affect prices is the onion price fluctuation scenario, which has recurred several times, notably in 2019. India is one of the largest producers of onion globally with production concentrated in a few key states, including Maharashtra, Karnataka ,and Madhya Pradesh .When adverse weather conditions affect production in these regions, it disrupts supply and causes significant price fluctuations.
Supply Dynamics: 1. Adverse Weather Conditions: In 2019, heavy rainfall and flooding in key onion-producing states like Maharashtra and Karnataka damaged crops, leading to a sharp reduction in onion supply. The damage to the crops was significant, reducing market arrivals by around 30-40% in major wholesale markets. 2. Storage Losses: Onions are typically stored in warehouses to ensure supply between harvest seasons. However, the excessive rainfall and humidity led to storage losses, further reducing the available supply in the market. 3. Delayed Harvest: The unseasonal rains also delayed the harvest of the Kharif onion crop, which typically arrives in the market from October to December. This delay created a supply crunch during the festive season when demand was high. Demand Dynamics: 1. Seasonal Demand: The period from October to December sees a seasonal increase in onion consumption due to festivals and weddings in India. As demand rose during this period, the already constrained supply struggled to meet it. 2. Substitute Products: Despite rising prices, there were limited substitutes for onions in Indian cuisine, so consumers continued purchasing onions at higher prices, reflecting the inelastic nature of demand for this commodity. 3. Speculative Hoarding: As prices began to rise, traders and wholesalers started hoarding onions in anticipation of further price hikes, which further reduced the supply in the market and pushed prices up even more.
Impact on Prices: The price of onions in retail markets surged from around ₹20-30 per kilogram in August 2019 to over ₹150 per kilogram by December 2019. The price increase led to widespread public outcry and government intervention.
Government Intervention: 1. Export Ban: In September 2019, the Indian government imposed a ban on onion exports to stabilize domestic prices. This aimed to increase the available supply in the domestic market. 2. Import Measures: The government also initiated onion imports from countries like Egypt, Turkey, and Afghanistan to alleviate the supply crunch and stabilize prices. 3. Stock Limit: To prevent hoarding, the government imposed stock limits on traders, reducing the amount of onions they could store. This aimed to release more onions into the market to lower prices
. The graph above shows the sharp rise in onion prices in India during 2019, with prices increasing from around ₹25 per kilogram in August to a peak of ₹150 per kilogram by December. This price surge was driven by a combination of supply shortages due to weather-related crop damage and strong seasonal demand, highlighting the classic interaction between supply and demand in affecting market prices.
